Asset value rule to be simplified

THE INTERNATIONAL body that sets down the accounting standards applying to all companies and funds listed in Ireland has unveiled plans to simplify a key valuation rule that has been blamed for worsening the financial crisis.

In the face of political pressure from Germany and the G20 group of industrialised and emerging market states, the International Accounting Standards Board (IASB) has proposed revisions to the rules governing the “fair value” of assets.

The IASB, which oversees and develops the IFRS accounting standards that prevail in Ireland, said its proposal will make it easier to understand financial statements by greatly reducing complexity in asset valuation.

To facilitate the non-mandatory introduction of the change in time for accounts filed in respect of the fiscal year ending on December 31st, the IASB has reduced its consultation period on the draft changes to two months from three months.

Mandatory application, which must await EU approval, is unlikely before 2012.

“The proposals also answer concerns raised by interested parties during the financial crisis (for example, eliminating the different impairment approaches for available-for-sale assets and assets measured using amortised cost),” the IASB said.

At present, there are more than 20 means of classifying the value of different assets, making it complex to decide whether they should be “marked to market” or priced according to the original value of the transaction. The change to International Accounting Standard 39 cuts the number of categories to two: fair value and at amortised cost.

“A financial asset or financial liability would be measured at amortised cost if two conditions are met: the instrument has basic loan features; and the instrument is managed on a contractual yield basis,” the IASB said. “A financial asset or financial liability that does not meet both conditions would be measured at fair value.”

Thus asset such as bonds, which generate stable and predictable revenue, would be priced at cost so long as they are are not being traded. Traded assets with unpredictable revenues, such as derivatives, would be priced at fair value.

“The financial crisis has demonstrated that investors need to be given a better understanding of information presented in the financial statements about financial instruments held or issued by a company,” IASB chairman Sir David Tweedie said.

Stating that the proposals were a first step, he said they also respond to concerns raised about the accounting for financial instruments. The IASB hopes to develop a common standard with its US equivalent, the Financial Accounting Standards Board.